Country Rankings - Cyprus

Cyprus has put five new double tax agreements into effect, including, importantly, one with the Ukraine, which includes beneficial treatment for real estate owned through a Cyprus holding company. The country's DTA with Russia used to include such treatment, but the Protocol signed a year ago imposed limits on real estate holding companies, albeit only coming into effect in 2017. Although Cyprus has come in for a great deal of negative publicity since the "bail-in" imposed on bank depositors by the Troika earlier in 2013, it maintains an extremely tax-friendly environment for international holding companies, and double tax treaties are a key element of this regime, along with its 12.5 percent corporation tax rate and favorable rules on dividends and royalties. As a tax-friendly hub for investment into the European Union, Cyprus ranks alongside Ireland and Malta. Although the Government is, perhaps understandably, obsessed with its macro-economic problems (like it owes zillions of euros to the ECB and has no obvious means of paying them back) the Finance Ministry persists with its business-friendly policies, and is in no doubt about the importance of Russia and the Ukraine (and other ex-Soviet countries) to its future. China is also a looming presence. You don't hear so much about the UK, however, which as the ex-colonial power would be expected to play a large role in the economy, except that much of Cyprus's "boom" early in the century was fuelled by over-eager Brits who parlayed the gains they made on owning UK houses into desirable 2-bedroom apartments in Larnaca and Paphos. The UK property bust and changes in exchange rates have sent many of those newcomers scuttling back to the UK, leaving the Cyprus banks with bad housing loans and not much else. Russian and Ukrainian money (and Czech, Polish and Slovakian, etc etc) seems much more secure, by comparison. Slavic tourism and investment is increasing by leaps and bounds; nowadays a walk along the seafront in Larnaca will yield you more Russian-speakers than English-speakers, something unthinkable ten years ago. Russian language colleges are packed with would-be Cypriot waiters, competing against their Romanian and Bulgarian rivals! Well, I exaggerate; but not by much.Source:
www.tax-news.com/news/New_Cyprus_DTAs_Take_Effect____63229.html

Actually it is inexplicable that Cyprus has played a nominally winning hand so badly. Perhaps it would have been asking too much for it to resist the flood of suspect money that came rushing at it from Russia in the 1990s, but that had been digested by the time Cyprus joined the EU (along with Malta) in 2004. The damage was then done by a property boom in which the entrenched and moderately corrupt ruling class enriched itself with no regard to sustainability or the rule of law. While they were playing at being property moguls, sowing the seeds of an eventual banking collapse, the public sector grew out of control and opportunities for well-founded economic growth went a-begging. There is almost no e-commerce development in Cyprus – why not? The stock market more or less collapsed early in the century because of a speculative boom, and has never recovered; instead, it merged with the Greek stock exchange in a slow-motion suicide which has yet to be resolved. By 2008, when the writing was on the wall for Cyprus's banking and property boom, and sensible people understood what lay ahead, the country saddled itself with a five-year term of maladministration under a Communist President, who has done 20 years' worth of damage to a situation which, though bleak, could have been saved by urgent reforms. Now it's too late. Cyprus has such natural advantages that it will bounce back, but it will not be soon.Source:
www.lowtax.net/asp/story/front/Cyprus_Parliament_Approves_Bailout_Deal____60616.html

Cyprus, on the other hand, is now sinking under the weight of the Troika's ill-advised bail-in. It's not that it was a bad idea to let a bankrupt bank (Laiki or Popular Bank) collapse, or even to break it into "good" and "bad" halves, as the Irish did; what was foolish was to saddle the still-just-about solvent Bank of Cyprus with the EUR9bn of ELA (Emergency Liquidity Assistance) stupidly provided to Laiki by the European Central Bank, with the result that BoC's remaining depositors don't trust it to remain afloat, and can't wait to get their money out, so that the Government doesn't dare to lift capital controls. The President has been reduced to writing begging letters to the Troika and even publishing them, in the hope that the Troika will be shamed into re-writing the bail-in deal. Meanwhile Cyprus Airways is insolvent and can't afford to pay the redundancy packages forced on it by the Troika; and the Government, amazingly, has reassured the trade unions that there will be no compulsory redundancies among civil servants, which is the exact opposite of what the Troika wants and the country needs. Cyprus still has all its basic advantages, like Malta, but at the moment it seems to be systematically destroying itself.Source:
www.lowtax.net/asp/story/front/Cyprus_Parliament_Approves_Bailout_Deal____60616.html

Countries that increase taxes don't normally get rewarded in this column, but Cyprus deserves a gong for buckling down to the task in hand and pushing through a series of tax hikes which were part of the "bail-out" or "bail-in," depending on how you look at it. Of course, that EUR10bn is a fairly good carrot, and they won't get it unless they do what Mummy Brussels says. The Parliament has yet to authorize the whole deal, and it looks as if this will only be achieved if the opposition (the communists who got them in this mess in the first place) abstains. The President's right-wing coalition doesn't have a majority in the house. There's no doubt that many people are suffering a lot: the case of the orphans left behind after a deadly air disaster six years ago is particularly sad, since their compensation money was being held on trust in the Bank of Cyprus and looks to be lost along with other deposits exceeding EUR100,000. But generally, the hysteria over the "wrecking" of Cyprus's economy is probably overdone; most people seem to be displaying a remarkable sense of national purpose, and getting on with life. The island still has low tax rates, all of its tax treaties, its English language, a well-educated work-force, and its climate. Where else would a Russian take her money?Source:
www.lowtax.net/asp/story/front/Cyprus_Parliament_Raises_Taxes____60506.html

One country which is conspicuous by its absence from the TPP talks is of course China. Although there are ongoing negotiations between the Middle Kingdom and various other countries, and China has FTAs with a scattering of other countries, notably including ASEAN and New Zealand, on the whole it is lagging. And it considers itself as an injured party in trade affairs, complaining this week about the level of "dumping" and "counter-vailing" measures it is subject to, particular emanating from the USA. A lot of the problem revolves around the designation of China as a "non-market economy" (NME). For anyone who, like me, finds it extraordinary that China should still be regarded as an NME, a word of explanation is in order: an NME is a country in which the State subsidizes enterprises or indulges in other non-market behaviour, despite WTO rules against it. So, an NME is allowed to cheat, if you will; but the other side of the coin is that for an aggrieved counter-party, the burden of proof is lower in anti-dumping proceedings. China's accession agreement to the WTO allows it to retain NME status only until 2015; but the change is not in China's gift, and both the USA and the EU persist in regarding China as an NME, despite frequent requests from China for them to treat it as a market economy.Source:
www.lowtax.net/asp/story/front/China_Sees_Itself_Subject_To_Increasing_Trade_Friction____60398.html

Poor old Cyprus. There is plenty about the crisis earlier on in this week's issue, and by the time you read this they will all presumably have worked out a solution, so I won't go on about the actual deal any further. Inevitably it will lessen the island's attractiveness as a business destination, if only for a while. Cyprus will recover; but the point I want to draw out of this affair is that the EU-wide despositors' guarantee creates a gigantic mountain of moral hazard, both for banks and for depositors, and therefore it increases risk and reduces competition, which is the opposite of what any government should want to achieve. Of course I am not against deposit insurance, but it should be provided against assets that are sufficient to cover 100% of any likely level of claims, which if you think about it is the case with any normal, private insurance company. It was completely wrong of the EU to say at a stroke that all deposits under EUR100,000 were covered. Covered by whom? Covered by what? Not by the banks, who were not required to pay into an asset pool, but were let off the hook by a bland statement that individual countries would "stand behind the guarantee." Suppose that Cyprus had accepted the haircut as originally proposed, being 7% or so of insured deposits, which equals about half of the EUR5.8bn that was to be provided. That EUR3bn or so is insured, right? So the government, which hasn't got any money, has to pay it back to the people it has just robbed. Ah, no, says the government, we are going to give you shares in that oil and gas instead. What a joke! What kind of insurance is that?Source:
www.lowtax.net/asp/story/front/Cypriot_Tax_Regime_Sabotaged_In_EU_Bailout____60146.html

Congratulations to Cyprus for having booted out the Communists in favor of a right-wing party for their next five-year presidential term. The system in Cyprus potentially allows for strong government, with the President appointing a cabinet and a single parliamentary body making the laws. For the last five years the socialist administration has made one catastrophic blunder after another, only held back by an antipathetic legislature. Now the new President will have control of the administration and the parliament, so some of the obvious steps can be taken to return Cyprus to health, including privatizing crony-ridden state organizations such as the telecommunications authority, the airline and the electricity utility. First of course there is the small matter of the EUR17bn rescue package being put together by the troika. The new government insists it will not permit a hair-cut for bank depositors, but will be able to use the threat of that as a lever to prise open the state enterprises, which would otherwise probably go on strike for ever. Then there is the 10% corporation tax rate, which the Government is desperately keen to retain; the quid pro quo for that may be to allow the troika to get its hands on part of the offshore gas bonanza that seems to be developing in the Mediterranean. So it's all to play for!Source:
www.tax-news.com/news/New_Cyprus_President_Sceptical_on_Financial_Transactions_Tax____59960.html

Rich pickings this week among countries that have got it wrong from my perspective, but the lowest-hanging fruit has to be Cyprus, which has thrown away all its God-given advantages is a spectacular display of ministerial and financial incompetence, led by Comrade Christophias, who is leaving office "with his head held high." The troika (Brussels, ECB and IMF) is going to wait until elections in February deliver the coup de grace, and the current left-wing administration (and that's being polite) is replaced by a more palatable alternative, with whom they hope they can then do business. "The business" will include abandoning the COLA (inflation-linked wages), wholesale privatizations of mis-managed and feather-bedded State monopolies, savage cuts to the number and costs of public sector employees, and, perhaps, more tax increases. Like the Irish, the Cypriots will hope that they can cling on to their low (10%) corporate tax rate, but it will be a struggle. How the Cypriot banks could have managed to lose billions through their Greek bond holdings, when three years ago they were proudly saying they didn't have any, is one of those mysteries of Nature which we may never penetrate. Another one is why the EU clings to its system of rotating Presidencies, which has seen the buffoonish Christophias lording it over the Union's proceedings for the last six months. Just the cost of the traveling EU Presidential circus probably subtracts a tenth of a percent from European GDP; but that's something else they will never tell us. They wouldn't dare!Source:
http://www.lowtax.net/asp/story/front/Cyprus_Bailout_Delayed_To_March____59185.html

Cyprus has the presidency of the European Union until the end of the year, and perhaps it's this that has encouraged it into imagining that it is immune from the laws of economics. How its banks could have been so stupid as to invest heavily in Greek bonds in 2011 when they had proudly boasted six months before that they had already got rid of them all is one of nature's mysteries, like the fact that prime numbers come in pairs, that will never be unravelled. Presumably someone knew someone. Nowhere was it ever more true that 'it's not what you know, it's who you know' than it is in Cyprus. But even if it's true that the banks have got themselves into a EUR10bn hole (equal to EUR15,000 per head of the population), that's not really the problem, since it's been agreed by now that France and Germany are going to pick up the tab in the spanking new United States of Europe. The real problem is that the government is one of the worst in the whole world, and in complete denial of economic reality under a Communist President, except that he isn't really a Communist, or for that matter anything at all except a nice, cuddly old bloke who does what the unions tell him. He is telling the Troika that he would fight in the streets rather than give up the COLA (wage/price escalator), and the unions would be happy to see him do it as well. Even in Italy they gave up the scala mobile (moving staircase) 20 years ago. You have to be seriously bonkers to think that this is going to cut it in the modern world. They say they're going to run out of money in December. Not even Russia is going to help them this time. When Angela Merkel says that she doesn't expect serious negotiations to start until next spring, what she really means is: 'until he's gone'.Source:
http://www.lowtax.net/asp/story/front/Cyprus_Confident_Bailout_Deal_Imminent____58065.html

Cyprus, like Ireland, is grimly clinging on to its 10% corporate tax rate while the deathly avengers of the Troika wheel and circle aboutits head. Well if only they were wheeling and circling around Comrade Cristofias, as he is known on the island, although he is now only the second-ranking Marxist in the EU after Comrade Hollande's accession to power in France. But Cristofias is enjoying his moment in the sun during Cyprus's presidency of the Union, so he is immune from attack. If I was Cypriot Finance Minister, I would announce a phased programme of corporate tax cuts arriving at a nil rate by 2022 and stick two fingers up to Brussels and the IMF. With all that sun and gas, Cyprus really hasn't got anything to worry about, so the ritual dance over its banking shortfalls is just a scene from the Theatre of the Absurd.Source:
http://www.lowtax.net/asp/story/front/Cyprus_Hanging_On_To_Fiscal_Autonomy____57369.html

It seems strange to be awarding a gong to Cyprus, which has been suffering for years under an inept and venal regime which does everything imaginable that is wrong for the country's future; but it remains a good place to do business, and even this appalling government has to be congratulated for refusing to countenance any increase in its corporate tax rate, the lowest in the EU. In this stance it is copying Ireland, which also refused such an increase during bail-out negotiations. It will be difficult for the troika to deny Cyprus what it gave to Ireland. Even the bail-out can be seen in a positive light, since the troika is likely to call a halt to the state gravy-train which has been sapping Cyprus's life-blood for so long now. Such idiocies as the COLA need to be swept away, and if there is to be a confrontation with the unions, then bring it on, will be most people's view; it's long overdue.Source:
http://www.lowtax.net/asp/story/front/Cyprus_Stands_Firm_On_Corporate_Tax_Ahead_Of_Bailout____56128.html

It's difficult to explain why Cyprus has driven the EU to attack its treatment of imported cars from other EU states. It's not as if nobody had noticed until now that a new resident, spending EUR300,000 on building himself a new house, and wanting to import his treasured 20-year-old MGB from the UK is forced to pay registration duty on its new value.The local English-language newspapers have been full of such horror stories ever since Cyprus joined the EU in 2004 and started to break Community law with its continuing treatment of such cases. It can't be for the money, surely? The government is so cack-handed financially that this intrinsically rich and successful country has been forced to crawl to the Russians for a low-interest loan, and even then managed to lend billions to the Greek government when the whole of the rest of the world knew Greece was bankrupt. No, I'm afraid it's just bureaucratic muddle. As between cock-up and conspiracy, in Cyprus it's always the first.Source:
http://www.lowtax.net/asp/story/front/European_Businesses_Report_FDI_Regulatory_Problems_In_China____55714.html

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